If you are not familiar with George Soros’ Theory of Reflexivity, something he credits for making him incredibly rich and successful, here are a few good summary articles.
To very quickly summarize, when it comes to the stock market and investing we are always dealing with incomplete and/or imperfect information. At certain times that leads to so called positive or negative feedback loops. Leading various financial instruments or overall markets to diverge significantly from their true value.
For example….
Take a highflying tech stock like Amazon (AMZN) for example. The company has made little in the way of income (in relation to its market cap) for the majority of its existence (over 15 years) but the stock has continued to soar. This is happening because people formed a number of positive beliefs about the stock. These beliefs could be that the company will make tons of money someday because it’s innovative, eating market share, or has a secret profit switch it can flip whenever it wants. Or maybe people continue to buy the stock because it’s gone up for a long time and so they assume it will continue to go up.
Mr. Soros goes on to explain:
Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced.
Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.
How does any of that apply to Bitcoin today?
I am glad you have asked. As we have argued many times before, Bitcoin has no real value. It is worth whatever the next fool is willing to pay for it. May it be 1 cent or $40K. The value itself is irrelevant.
It is now obvious that a massive possitive feedback loop has been established for the currency. With people arguing all sort of nonsense, from Bitcoin eventually replacing the USD, to keeping the FED honest, to the only place to hide in case of a nuclear war (good one).
Long story short, Bitcoin is the best thing since the Tulip Mania of 1636.
However and as Mr. Soros’ theory teaches us, such positive loops eventually end up imploding on themselves. And when they do, the underlying assets typically collapse in a spectacular fashion as well.
If you would like to find out exactly what happens next based on our Timing and Mathematical work, please Click Here.